Politicians and homeowners are clamoring for mortgage relief. That’s unlikely until mortgage servicing companies such as Wilshire Credit get ready to deal.

BY BEN JACKLET

ILLUSTRATION BY MARTIN GEE

The gray, box-like building at the corner of Southeast Millikan Way and Murray Boulevard seems like any other nondescript office park in Beaverton. But there are a few notable differences. The huge parking lot is full to overflowing, an uncommon sight in this recession. The smoking area is humming with a constant flow of employees moving in and out of the main building. A large electronic sign in the lobby welcomes IBM and Bank of America to Wilshire Credit Corporation headquarters.

Wilshire Credit executives aren’t talking about their plans publicly, but this little-known Oregon-based financial services company is planning to expand dramatically as the result of a strategic deal between the world’s largest technology services provider and the nation’s biggest bank. Mid-level employees say they have been told that as many as 400 more people could be hired once the IBM deal goes through.

Four hundred new jobs would be huge in Oregon, but the fact that Wilshire Credit is expanding is not necessarily good news for the economy. Wilshire Credit is the largest subprime mortgage servicing company in the Northwest and 13th-largest in the nation, handling more than $20 billion in loans and qualifying for $453 million in loan relief for troubled borrowers under the federal government’s $75 billion Making Home Affordable program. Wilshire Credit’s 900 employees are in the business of collections, delinquency and foreclosure, and with more than 5 million Americans on the verge of losing their homes, business has never been brisker.

IBM announced in October that it would buy the core operating assets of Wilshire Credit from Bank of America for an undisclosed amount. Once the deal clears, Bank of America will take responsibility for servicing Wilshire’s current loans, while IBM will use its new purchase to enter the lucrative but tricky field of handling subprime loans. The deal represents a vote of confidence for a company that has done well in a very challenging sector, earning accolades from the rating agencies that grade the performance of mortgage servicers on behalf of investors. Fitch Ratings recently gave Wilshire Credit its highest grade and praised the company’s efficiency, expertise and “solid default management and loss mitigation practices” in an August 2009 report.

But Wilshire Credit has more than its share of detractors. Websites are full of horror stories from Wilshire Credit customers claiming they were lied to and tricked into believing they were being helped only to lose their homes to foreclosure. Several homeowners contacted by Oregon Business accused the company of misleading them. “I feel like Wilshire has ruined my life,” says Judy Szabo of Medina, Ohio, a 59-year-old woman disabled by multiple sclerosis.

Federal officials led by Michael Barr, the U.S. Treasury’s assistant secretary for financial institutions, have also taken aim at mortgage servicing companies such as Wilshire Credit, blaming them for the lackluster performance of the government’s loan relief program. Just 4% of delinquent homeowners nationally have been assisted with permanent loan modifications so far, and the worst performer of all by that measure is Wilshire Credit’s parent company, Bank of America, which had permanently modified loans for just 98 out of more than a million at-risk homeowners as of the end of November 2009. That number grew slightly in December, to 3,183 permanent modifications, an improvement but still just a sliver of the more than a million subprime loans the bank holds.

The government no longer tracks Wilshire Credit’s performance specifically under the program, but it did from April 20, 2009, when Wilshire first qualified to participate, up until the end of September 2009. Over that period Wilshire Credit granted temporary trial loan modifications to just 10% of borrowers as compared to the average of 16% for all participating companies, according to U.S. Treasury statistics that did not tally permanent loan modifications. Since October Wilshire’s statistics have been rolled into Bank of America’s less-than impressive numbers. IBM has not qualified for Treasury money but may eventually once the Wilshire deal goes through.

The sluggish start to the affordable homes program has irritated watchdogs and elected officials such as Sen. Jeff Merkley, the Oregon Democrat who sits on the Senate’s banking committee. “Millions of families are still in danger of losing their homes to foreclosure and they deserve the same kind of assistance and attention that the big Wall Street banks received,” says Merkley spokesman Mike Westling. “The bottom line is that the financial industry created this mess by steering families into bad loans and it’s now their responsibility to help those families stay in their homes.”

U.S. Treasury officials overseeing mortgage relief are vowing to pressure servicing firms to improve their performance or face penalties and embarrassment. “It’s premature to draw a ny conclusions about individual servicers, but we won’t hesitate to call out bad actors if they fail to meet [program] goals,” says Meg Reilly, a U.S. Treasury spokeswoman.

The U.S. Treasury has even set up “SWAT teams” charged with investigating servicing companies from the inside out, to hold them accountable.

Wilshire Credit, Bank of America, and IBM officials denied repeated requests from Oregon Business for interviews and access. But a review of public documents, interviews with people familiar with the industry, and discussions with the company’s customers and employees paints a picture of a well-run company that has served its investors well, but has little financial motivation to pursue permanent loan modifications rather than foreclosure.

Wilshire Credit started off as a subsidiary of Wilshire Financial Services Group, the creation of infamous Portland financier Andrew Wiederhorn. Wiederhorn’s $3 billion empire crashed into bankruptcy in 1999, and he later served time in federal prison for his role in an elaborate pension scam, but the credit company he founded has prospered. Wilshire Credit has grown steadily under the leadership of Jay Memmott, who took over as CEO in 2000. Wiederhorn is no longer connected with the company.

Memmott and Wilshire were early players in the complex business of dealing with subprime mortgages on behalf of remote investors. Fueled with easy money and enabled by lax oversight, the booming sub prime business created huge opportunities for companies willing to do the dirty work of collections, foreclosure and sale of bank-owned homes. Wilshire Credit was purchased by Merrill Lynch in 2004 for $52 million and doubled its Oregon headcount as Merrill Lynch amassed a $70 billion subprime empire globally. That house of cards collapsed in 2008, nearly bringing down the global economy with it. But throughout all the turmoil, Wilshire Credit has done well, growing from 450 employees to 900 in Beaverton over five years and opening a second call center in Salem in 2006.

As the recession took hold, Wilshire Credit saw its inventory of foreclosures double from 6,748 to 13,833 homes between the first quarters of 2007 and 2008. The company responded by accelerating its sales of bank-owned homes. According to the company’s website, Wilshire Credit has closed 14,500 “real-estate owned” or REO home sales. Recent trade journal reports indicate that Wilshire may stop selling foreclosed homes, in order to focus on a massive increase of new loans expected to result from the pending IBM purchase. Housing Wire reported on Jan. 22 that Wilshire Credit is expected to add "tens of billions of dollars" worth of troubled loans from the mortgage giant Fannie Mae as part of the IBM deal.

Although Wilshire Credit is based in Oregon, most of the loans it handles are in high-foreclosure areas such as California and Florida. And business is booming. The recession may be officially over, but foreclosure rates keep rising. An estimated one of four mortgaged American homes is under water, meaning the homeowner is actually a debtor who owes more than the home is worth. Growing numbers of people are choosing to walk away from adjustable- rate mortgages they can’t afford to pay, a tactic that University of Oregon economist Tim Duy calls “strategic default.” It is up to companies such as Wilshire to keep as many loans as possible performing, and to take action when the borrower gets behind on payments. Its main choices in these situations are modifying the loan to make it more affordable or moving toward foreclosure.

The government’s mortgage relief plan is pressuring Wilshire and its peers to pursue loan modification over foreclosure, arguing that foreclosure devastates families and brings down property values. But other forces are pushing in the opposite direction. It is in the interest of Wilshire Credit’s clients, the investors who purchased the mortgages, to keep the principal and interest on these loans as high as possible. The same applies to Wilshire Credit, which receives most of its revenue as a percentage of the principal balance of the loans it services and a lesser but still substantial amount from late fees and finance charges. According to a recent report by the Boston-based National Consumer Law Center, “A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified and no penalty, but potential profit, if the home is foreclosed,” partly because servicers recover their fees before investors are paid in the event of foreclosure.

That 50-page October 2009 report, titled Why Servicers Foreclose, When They Should Modify, also found that mortgage companies frequently hedge their bets by pursuing loan modification and foreclosure at the same time. This tactic “causes havoc with homeowners,” according to the report’s author, attorney Diane Thompson. “Homeowners often believe or are led to believe that they can safely ignore their foreclosure papers — only to discover that their home is sold out from under them.”

For 52-year-old Belinda Jordan of Nashville, Tenn., it seemed as if Wilshire’s employees were deliberately misleading her for reasons she could not fathom. Divorced and working two jobs, Jordan says she missed her first payment in September 2008 after her monthly house payment on her adjustable rate mortgage jumped from $843 per month to $1,400. She thought she was working with Wilshire to modify her loan only to be notified in February 2009 that her home was in foreclosure. “It was the most devastating news I’ve ever received in my life,” she says.

Jordan claims she sent the same documents to Wilshire Credit six different times and did at least three phone interviews that she thought were for lowering her monthly payment. “Every time I contacted them they asked for the same documents,” she says. “I never got to speak to the same person twice. I was just shuffled back and forth and put on hold constantly. After a while I realized they were just jerking me around and lying to me.”

Jordan walked away from the house, which she says is on sale through foreclosure for $252,000.

Hundreds of similar stories can be found at websites such as Ripoffreport.com and the TheMortgageInsider.net, resulting in dozens of lawsuits. But that may be the nature of the business. Wilshire Credit’s most difficult customers, after all, are people who have stopped paying their bills.

Bank of America absorbed Wilshire Credit when it bought Merrill Lynch, but it was too busy trying to make sense of its much larger subprime purchase of Countrywide Financial to do much with the operation in Beaverton, according to industry reports. The situation has changed with the IBM deal.

IBM’s announcement that it planned to purchase Wilshire Credit’s core operating assets received minimal coverage in the business press; it was not even reported in The Oregonian. But insiders recognized immediately that the deal was significant. A page one story in the Nov. 20 edition of American Banker headlined “Why IBM took the plunge into mortgage servicing” explained that IBM sees huge opportunities in the servicing of millions of loans going into default because the industry is known for its “dearth of software” and many large banks overwhelmed with bad loans might consider offloading them to IBM, which has deep financial expertise and already provides technical services for the U.S. Treasury.

Eric Ray, general manager for financial services for IBM’s Global Technology Services division, says: “The acquisition of Wilshire’s assets further demonstrates IBM’s commitment to delivering robust and innovative mortgages during a difficult time for the mortgage industry. It also reinforces IBM’s commitment … to partner with our financial services clients in solving their most difficult challenges.”

If IBM’s goal is to reinvent the subprime mortgage business through superior systems and technology, this bland office park in Beaverton will be ground zero for that effort. Recent local hires noted on LinkedIn’s Wilshire Credit page include a random-access memory administrator, a corporate recruiter, a social networking recruiter and a special servicing asset manager. Among the recent promotions is a new vice president for “change management.”

It remains to be seen whether IBM and its new Oregon subsidiary will be able to solve the nation’s ominous foreclosure problem. But given the complexity and seriousness of the problem, it’s certainly worth a try. The subprime mess that smothered the economy has not been cleaned up. It has merely shifted arenas. What happens next is in the hands of companies such as Wilshire Credit, which are being watched more closely and pressured more intensely now than ever. Millions of investors and borrowers have stakes in how these companies do their dirty work. So do the U.S. Senate, the U.S. Treasury and, to a certain extent, all of us.

UPDATE: Housing Wire reported on Jan. 22 that Wilshire Credit is expectedto add "tens of billions of dollars" worth of troubled loans from themortgage giant Fannie Mae as part of the IBM deal. Wilshire Credit is alsoreportedly planning to stop selling bank-owned homes, presumably to focus onhandling the massive influx of loans from Fannie Mae.

Comments

+1#1Why would a servicer want to foreclose in this market? —
Jackie Kelly2010-03-25 19:04:32

My concern about this article is that it makes no mention of the fact that 55% to 60% of borrowers default even after a modification. Modifications are only helpful to those who can actually afford the home in the first place; not the case for a lot of homeowners who have lost their job or had a huge reduction of income.

No wonder servicers are desperate to get rid of these loans; with a re-default rate that high, whats the point of reducing interest rates and cutting the principal balance if it's a waste of time and 6 months later they have to foreclose anyway.

I love this quote, as I've heard dozens of times in similar articles: "the financial industry created this mess by steering families into bad loans". Anyone but the gambler is responsible when the odds in a risk turn sour apparently! There is no blame put on the realtors, construction industry, or most likely, the borrowers that had it ALL SPELLED OUT in the CONTRACT they signed (repeatedly, I'll remind you, closing docs require around two dozen signatures/initials to emphasize that the borrower fully agrees to the terms). I worked for BOA mortgage, and repeatedly tried to steer people away from risky loans. What did I get when I tried to explain what would happen? Harrassed and berated, especially when the risk taking borrower requested to speak with my superiors for being so blunt. These folks dug themselves in (with ample warning), and it shouldn't be up to anyone but them to dig out.

Mortgage loans have the most information about a person in one place most likely. That IBM who has a goal to Data Mine and create a super system of providing information to clients enabling them to make solutions using real time information and profiles. Well this is dangerous in my way of thinking.

UPDATE: The Oregonian reports that IBM plans to hire 600 people in Beaverton and spend $12 million on capital improvements and training. The company has posted openings for foreclosure managers and data analysts, among other positions.

Wilshire has lost over 20,500.00 with out interest on my loan which has never been in foreclosure or bakrupsty or refinaced throughtout the history of the loan. THen had the aldasaty to create a fab doc of a federal ind. and alter numerous part of the doc and numbers to accomodate themselves and comet fraud and deception.

In 2008 Wilshire called me and told me that after for faild modification packages they said that they were sending me the Obama Modification Package and to fill it out and send it back, well I did on September 4th of 2008 I called Wishire to see where my package was at and he told me it was still in review latter that same day I wen to pick up my mail and got a letter from Wishire telling me that my home was in foreclosure and was going to be acutiond off at the court house or I can short sell my home no one there ever told me that I had actually been given my modification they told me that it was better for us to short sell the home and I did. Then in 2009 January I called Wilshire to see when they were going to send me my last W-2's for my home since I continued to pay on my mortgage while it was going through a short sell, The Rep for Wilshire on the other line asked me why I had short sold my home and I told him because your company told me my house was in foreclosure then he droped the bom and told me that I had been approved for my modification at a 30 year fix at $900 a month and this is after my home is gone and I am disabled I called the Americans with Disabilities and the told me that I needed to get conpensation for the loss of my home he also told me to writ the modification department for copies of the notes from November back to September I did and they send me a latter telling they did not have to. They did fraud on me and I need some help and I can't afford an attorney what can I do I feel lost.

all i hear is that the reason people are losing their homes because they get behind or dont make their payments bull i have every reciept ,and every letter since i was with wilshire and i have dealt with this company for many years and they are the worst company i have every come in contact with.ask for your payment history and if you are lucky enough to get it you will see like i have that they did not apply your payment on time if they applied it at all, or they charged you with all these bogus fees that you should not have been charged attorney fees,inspection fees, bpo fees,sercuity deposits,appraisel fees,ect,ect and you arent aware of this you sent your payment every month and every three months they send you a forcloser letter,saying you owe 2,0000 3,000 4,0000 and you try to find out why and all your told is you didnt make a payment,when your bank statement shows you did.this goes on and on instead of everyone keeping a close eye on wilshire ,hell they been doing that and letting them get by with all their unlawfull activitys they should contact the consumers who are complaining and see their proff and check this company out.

The servicers are in the business of debt collecting not servicing. They make more money when you go to foreclosure than they would if you paid your mortgage. They want you to fail. They make more money from loss not from profit. They make money from Credit Default Swaps which is a form of insurance, other types of insurance, bail out funds, TARP funds. They make money from loss, not profit. Foreclosure is good for them.